We look at some ways you can invest in Brazil.
In 2001 Jim O'Neill, Goldman Sachs' Head of Global Economic Research, published a paper called "The World Needs Better Economic BRICs."
BRIC is an acronym made from Brazil, Russia, India and China, and O'Neill's argument was that the BRICs could easily become the four largest economies on Earth by 2050 since they had changed their economies to embrace capitalism.
Today I'm going to have a brief look at Brazil, the "B" in BRIC, why it should be on long-term investors' radars and how to get a piece of the action.
Investing overseas
One of the main reasons for investing overseas is to diversify away from Britain into other countries so as to spread your risks. But when you invest overseas you should pay some attention to the country's legal system, in particular its attitude towards property rights and the rule of law.
Of the four BRIC countries, Russia is by far and away the worst offender when it comes to respecting foreign investors, so much so that many people wouldn't touch Russian investments with someone else's bargepole!
China hasn't been much better but has improved in recent years in large part thanks to periodic executions of corrupt officials pour encourager les autres.
In contrast Brazil's legal system is based on Portuguese civil law, which is in turn is firmly rooted in Roman and German law, so it has a fairly strong system of property rights.
A fast growing economy
Brazil is the eighth largest economy in the world and is forecast to grow by 7% in 2010, a rate at which the developed nations can only dream of. Its stockmarket is on a historic price-earnings ratio of 15, well below that of India.
Whilst parts of Brazil are mired in terrible poverty, as anyone who's seen the film City of God knows only too well, Brazil has the second largest industrial base in the Americas and is particularly strong in automobiles, steel, chemicals and aircraft.
It might surprise you, as it did me, that Brazil's Embraer is the third largest aircraft producer in the world, behind Boeing and Airbus.
Brazil's economy looks set to continue growing strongly for the next decade or two. When Luiz Inácio Lula da Silva ("Lula") became President in 2002 many expected him to follow Venezuela's Hugo Chávez and impose a damaging mixture of populism and socialism.
Lula has confounded his critics by enacting a series of economic reforms and the economy has done well as a result. Whereas Brazilian state debt used to be viewed as junk, on par with Argentina, it managed to receive an investment grade rating in 2008.
The Brazilian economy should get a big boost when it hosts the 2014 football World Cup and the 2016 summer Olympic Games. These two events will put Brazil firmly on the world stage, as the 1988 Olympics did for South Korea, and draw the attention of investors.
Social problems are being fixed, slowly
Brazil, like most South American countries, has tremendous social and economic inequality and is thus a much more violent country than Britain having a murder rate some four times that of America.
However Brazil's recent economic growth has led a big improvement in the crime rate and fortunately Brazil doesn't have to deal with an insurgency like Colombia or Mexico's ongoing drugs war. As policymakers all over the world know, one of the best ways to cut crime is to boost economic development and Brazil is clearly doing that.
Ways to invest in Brazil
Brazil has many quoted multinationals such as the partly state-owned oil company Petrobras, which produces almost 2.3% of the world's daily oil needs, and Vale, the second largest mining company in the world.
As an alternative to direct purchase of Brazilian shares, there's the JP Morgan Brazil Investment Trust (LSE: JPB) which was launched last April. However it currently trades at a premium to its asset value, whereas investment trusts typically trade at a discount to their net asset value, so potential investors might want to wait for a discount to appear.
Another way to gain exposure to Brazil is via an exchange traded fund (ETF). ETFs are similar to unit trusts but with lower annual charges. You can buy ETFs through the stock exchange, exactly like buying shares, rather than having to go directly to the managers
There are several Brazilian ETFs quoted in New York; in Britain we have the iShares MSCI Brazil ETF (LSE: IBZL) which aims to track the MSCI Brazil index (MSCI is what used to be called Morgan Stanley Capital International). iShares MSCI Brazil's annual charges are about 0.74% of the fund and it yields 2.1%.
A nice point about ETFs is that they aren't liable for stamp duty, which makes them very popular amongst short-term traders whose profits are strongly affected by the 0.5% that the taxman helps himself to whenever you buy UK quoted shares.
A Bermudan angle
A more unusual way to gain exposure to Brazil is via the Bermudan-based investment company Ocean Wilsons Holdings (LSE: OCN). Ocean Wilson Holdings owns 58.25% stake of the Brazilian port operator and logistics company Wilson, Sons, which makes up roughly two-thirds of the company's net asset value.
Shipping and logistics companies are closely tied into the general level of economic activity in a country and will do well when the economy is growing strongly (as Brazil's is).
I wrote at some length about Ocean Wilsons last June here since when the shares have risen by almost 19%. Sometimes I get it right!
More from Tony Luckett:
>Tony owns shares in iShares MSCI Brazil ETF and Ocean Wilsons Holdings.
